Core investment theses - Segmentation

In order to develop an effective funnel with which to assess wireless investment opportunities, we came up with four fundamental investment theses at Nauta Capital, the venture firm that I am a partner of. Each represents a big idea that should become the basis of early/mid or late stage investment. I will discuss the first today:

Segmentation

Every consumer industry reaches maturation at some point, and as it does, it tends to shift from offering a basic service that the mainstream wants towards offering ever more targeted services. Think P&G emerging from the early soap industry in Cincinnati, or the explosion of specialty retail in the US, or the artful segmentation strategy of Alfred P Sloan at GM in the 50s. The wireless sector is clearly maturing globally, but it is largely still un-segmented. I believe that over the next 10-20 years we shall see some waves of segment offerings. I would argue that to date most of the segmentation effort - read RIM, iPhone, has come from the outside. The MVNO craze in the US was an early clumsy effort at segmentation that did not work, but now you are seeing the beginnings of a 2nd, smarter wave.

One of our investments, Jitterbug, is a great example of effective segmentation. It is targeting the mobility needs of seniors. Believe it or not, many VCs told the company that they loved the metrics but this segment was not very sexy! While saying you will "segment" rolls easy off the tongue, the reality is much harder. For example: almost everybody that designs phones is in their 20's to 30's, so it is very hard for them to put themselves in the position of a 65 year old who might have arthritis, weakening sight, some deafness, and discomfort with new technology. At Jitterbug, the engineers work very hard with the target demographic to understand how this feels, and even wear special gloves and eyeglasses to replicate the experience. Also, because everyone in the company is motivated every day of the week to create exciting experiences and ultimately value for themselves and their families through serving this segment, they find everything about it interesting and "sexy".

What could be other examples of current or potential segmentation in wireless?:

• Metro PCS, Leap: these companies have targeted people with several unique characteristics - they use the phone a lot, they don't travel much outside their metro area, they don't like to be committed to a contract (maybe because they have uncertainty on cash availability). On the other hand, they don't need all the bells and whistles. Metro and Leap have build business models optimized around these kinds of needs: for example, they have built very dense metropolitan mobile networks which enable them to serve minutes at a fraction of the cost charged by mainstream operators; they have designed a pretty inexpensive acquisition model, etc. Interestingly, as with any disruptive business model - they are starting to attract a broader cross section of segments - for example, some people are cutting the cord and shifting their "phone-line" to Metro or Leap (or another wireless provider).
• Kindle: Amazon, which I mentioned in an earlier post, has designed an end-to-end experience targeting intensive readers who favor some of the unique features of the Kindle - either the weight reduction, or the ability to adapt text size.
• RIM: lest we forget, RIM was at one point a segment play, targeted at VIPs who placed very high value on getting access to their e-mail 24/7. Since it originated this service in a very modest way in the late '90s, it has become a behemoth, but ultimately its core proposition is still in serving that niche (just turns out that lost of people place high priority on getting e-mail 24/7)
• Oh, by the way, I guess iPhone is also an example - initially targeting tech-forward Mac lovers that loved to use touch-screens, before it became a standard operating platform

I guess the point of these examples is to show three things:

1. To date, much of the innovation has come form outside of the mainstream. However, as shown by GM and P&G, it is possible for mainstream players in an industry to become effective segmenters. However, it will require strong leadership from the top to design and roll-out segmented strategies within a mobile operator (or the traditional OEM).
2. Traditionalists in the industry distinguish between facilities-owner (I build my own network) or not. I think these examples show that this is not the critical element (neither Kindle nor RIM nor iPhone "own" facilities". It is more important to ensure that you manage an effective user experience targeted at your segment.
3. What are you waiting for? (this is addressed to the operators)